In an economy where entrepreneurs with unequal ‘abilities’ face alternative investment projects, which differ in their degree of risk and productivity, we analyse the Nash equilibrium contracts arising from a banks-borrowers game in the context of asymmetric information. We show that, for a...

We analyse the Pareto optimal contracts between lenders and borrowers in a model with asymmetric information. The model is a generalization of the Rothschild-Stiglitz pure adverse selection problem to include moral hazard with limited liability contracts. Entrepreneurs with unequal ``abilities"...

Survey respondents strongly disagree about return risks and, increasingly, macroeconomic uncertainty. This may have contributed to higher asset prices through increased use of collateralisation, which allows risk-neutral investors to realise perceived gains from trade. Investors with lower risk...

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a...

We discuss the extent to which the expectation of a rare event, not present in the usual post-war sample data, but not rationally excludable from the set of possibilities – the peso problem – can affect the behaviour of rational agents and the characteristics of market equilibrium. To that...

We document a strong co-movement between the VIX, the stock market option-based implied volatility, and monetary policy. We decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), and analyze their dynamic interactions with monetary...

The fall in US macroeconomic volatility from the mid-1980s coincided with a strong rise in asset prices. Recently, this rise, and the crash that followed, have been attributed to overconfidence in a benign macroeconomic environment of low volatility. This paper introduces learning about the...

This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with unobservable processes for the inflation target and the natural rate of output which are filtered...

This Paper presents a dynamic theory of housing market fluctuations. It develops a life-cycle model where households are heterogeneous with respect to income and preferences, and mortgage lending is restricted by a down-payment requirement. The market interaction of young credit-constrained...

This paper studies the pricing of financial assets in a complete general equilibrium set-up. We begin with an asset pricing model à la Lucas grafted on a standard Real Business Cycles model. We provide a new decentralized interpretation of such a model in which firms make meaningful investment...